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International Business Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. UNIT 3 National Differences in Political Economy What Is A Political Economy? Political economy of a nation - how the political, economic, and legal systems of a country are interdependent they interact and influence each other they affect the level of economic well-being in the nation 2-3 What Is A Political System? Political system - the system of government in a nation Assessed according to the degree to which the country emphasizes collectivism as opposed to individualism the degree to which the country is democratic or totalitarian 2-4 What Is Collectivism? Collectivism stresses the primacy of collective goals over individual goals can be traced to the Greek philosopher, Plato (427-347 BC) Today, collectivism is equated with socialists (Karl Marx 1818-1883) advocate state ownership of the basic means of production, distribution, and exchange manage to benefit society as a whole, rather than individual capitalists 2-5 How Does Modern-Day Socialism Look? In the early 20th century, socialism split into 1. Communism – socialism can only be achieved through violent revolution and totalitarian dictatorship 2. in retreat worldwide by mid-1990s Social democrats – socialism is achieved through democratic means retreating as many countries move toward free market economies state-owned enterprises have been privatized 2-6 What Is Individualism? Individualism refers to philosophy that an individual should have freedom in his own economic and political pursuits can be traced to Greek philosopher, Aristotle (384322 BC) individual diversity and private ownership are desirable individual economic and political freedoms are the ground rules on which a society should be based implies democratic political systems and free market economies 2-7 What Is Democracy? Democracy - a political system in which government is by the people, exercised either directly or through elected representatives usually associated with individualism pure democracy is based on the belief that citizens should be directly involved in decision making most modern democratic states practice representative democracy where citizens periodically elect individuals to represent them 2-8 What Is Totalitarianism? Totalitarianism - form of government in which one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties 2-9 What Is Totalitarianism? Four major forms of totalitarianism exist today 1. 2. 3. 4. Communist totalitarianism – found in states where the communist party monopolizes power Theocratic totalitarianism - found in states where political power is monopolized by a party, group, or individual that governs according to religious principles Tribal totalitarianism - found in states where a political party that represents the interests of a particular tribe monopolizes power Right-wing totalitarianism - permits some individual economic freedom, but restricts individual political freedom 2-10 What Is The Link Between Political Ideology and Economic Systems? Political ideology and economic systems are connected countries that stress individual goals are likely to have market based economies in countries where state-ownership is common, collective goals are dominant 2-11 What Is An Economic System? There are three types of economic systems 1. Market economies - all productive activities are privately owned and production is determined by the interaction of supply and demand government encourages free and fair competition between private producers 2-12 What Is An Economic System? 2. Command economies - government plans the goods and services that a country produces, the quantity that is produced, and the prices as which they are sold all businesses are state-owned, and governments allocate resources for “the good of society” because there is little incentive to control costs and be efficient, command economies tend to stagnate 2-13 What Is An Economic System? 3. Mixed economies - certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning governments tend to own firms that are considered important to national security 2-14 What Is A Legal System? Legal system - the rules that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained the system in a country is influenced by the prevailing political system Legal systems are important for business because they define how business transactions are executed identify the rights and obligations of parties involved in business transactions 2-15 What Are The Different Legal Systems? There are three types of legal systems 1. Common law - based on tradition, precedent, and custom 2. Civic law - based on detailed set of laws organized into codes 3. Theocratic law - law is based on religious teachings 2-16 How Are Contracts Enforced In Different Legal Systems? Contract - document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved Contract law is the body of law that governs contract enforcement under a common law system, contracts tend to be very detailed with all contingencies spelled out under a civil law system, contracts tend to be much shorter and less specific because many issues are already covered in the civil code 2-17 Which Country’s Laws Should Apply In A Contract Dispute? The United Nations Convention on Contracts for the International Sale of Goods (CIGS) establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between buyers and sellers who have their places of business in different nations Ratified by the U.S. and about 70 countries but, many larger trading nations including Japan and the U.K. have not agreed to the provisions of CIGS and opt for arbitration instead 2-18 How Are Property Rights And Corruption Related? Property rights - the legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource 2-19 How Are Property Rights And Corruption Related? Property rights can be violated through 1. Private action – theft, piracy, blackmail 2. Public action - legally - ex. excessive taxation or illegally - ex. bribes or blackmailing high levels of corruption reduce foreign direct investment, the level of international trade, and the economic growth rate in a country 2-20 How Are Property Rights And Corruption Related? The Foreign Corrupt Practices Act makes it illegal for U.S. companies to bribe foreign government officials to obtain or maintain business over which that foreign official has authority facilitating or expediting payments to secure or expedite routine government action are permitted 2-21 Which Countries Are Most Corrupt? Rankings of Corruption by Country 2010 2-22 How Can Intellectual Property Be Protected? Intellectual property - property that is the product of intellectual activity Can be protected using 1. Patents – exclusive rights for a defined period to the manufacture, use, or sale of that invention 2. Copyrights – the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit 3. Trademarks – design and names by which merchants or manufacturers designate and differentiate their products 2-23 How Can Intellectual Property Be Protected? Protection of intellectual property rights differs from country to country World Intellectual Property Organization Paris Convention for the Protection of Industrial Property To avoid piracy, firms can stay away from countries where intellectual property laws are lax file lawsuits lobby governments for international property rights agreements and enforcement 2-24 What Is Product Safety And Liability? Product safety laws set certain standards to which a product must adhere Product liability involves holding a firm and its officers responsible when a product causes injury, death, or damage liability laws tend to be less extensive in less developed nations 2-25 Why Is Product Safety And Product Liability Important? Question: Question: Does the high cost of liability insurance in the U.S. make American companies less competitive? Is it ethical to follow host country standards when product safety laws are stricter in a firm’s home country than in a foreign country? Question: Is it ethical to follow host country standards when liability laws are more lax in the host country? 2-26 How Can Managers Determine A Market’s Overall Attractiveness? The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country Other things being equal, more attractive countries have democratic political institutions, market based economies, and strong legal systems that protect property rights and limit corruption 2-27
